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Four tips to choose the RIGHT mutual fund

Last updated on: August 9, 2012 12:33 IST

Four tips to choose the RIGHT mutual fund

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Aditya Prasad, Perfios.com

Are you thinking about a mutual fund that best suits your investment goals? Look no further, because here is a step-by-step guide on how to choose the right mutual fund for your investment needs.

1. What are the goals for your investments?

Yes, of course we all want to make more money than we invested, but take some time to properly assess how you want your returns. Are you planning for retirement? Or are you looking for short-term gains?

Identifying your investment goals can help you choose between funds. Another thing that you need to assess is risk.

Remember, the younger you are, the riskier you can afford to get. This could mean high returns, but also high losses. Finally, how long can you afford to let go of this money? Do you have enough money to pay the annual sales charges that could take out a significant amount of your return?

Mutual fund investors should expect at least a gestation period of five years to yield good returns.

The author is chief evangelist, Perfios.com


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2. Choosing the right type of funds

There are various types of mutual funds available on the market. If your goals call for a longer-term use, then opt for a long-term capital appreciation fund. Your risk and the volatility of the investment remains on the average end in this type of fund. They typically have invested in common stocks, and have tendencies to incur large gains.

However, if you are looking for long-term goals but don't want to take as much risk, then a balanced fund would be ideal for your needs as they keep a balance of both stocks and bonds.

If you are looking for some quick returns, a good option would be to invest in an income fund. Some of the common holdings in this type of fund include government and corporate debt holdings. Here, the risk tolerance remains low.

Use financial planning software to keep track of your mutual funds and other investments to check if you are in line with your investment goals.


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3. How much does investing in a mutual fund cost?

Before you invest in a mutual fund, be mindful of the charges that you will need to pay. A sales fee (more commonly known as load fee) will be charged on acquiring or selling the investment.

When you buy the investment, you pay a front-load fee, and when you exit the fund, you pay a back-load fee. This could have a charge of 3 to 6 per cent of the total investment amount. To avoid these fees, you could opt for a no-load fund. But no-load funds also carry charges like management and administration fees.

When you look at the management expense ratio, make sure it is relatively low, the higher the ratio, the higher the charges. Funds also charge 12b-1 fees, which are used for promotional material for the fund. The charges could be up to 0.75 per cent of the total fund value.

4. How to choose the right fund for you?

Research is the main key word to choosing the right fund. Check who is managing the fund, how well the fund has performed against benchmarks and the size of the turnover? Was there an unusually high turnover? Was the fund very volatile against the markets? Is the fund manager reputable? Also check the size of the fund.


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